While professional pension funds feature in the pensions landscape in countries such as Germany, in the Netherlands they are a much rarer animal.
There are only 12 such funds in Holland. One of these is the Stichting Pensioenfonds voor Fysiotherapeuten (SPF), the pension fund for independent physiotherapists.
The €2.5bn fund was founded following a request made by a majority of independent Dutch physiotherapists to the government in 1978. It is mandatory for all independent physiotherapists, both self-employed and salaried, and distinguishes itself from other professional pension funds in that its active members are also the sponsors of the fund.
Unusually for Dutch funds, the scheme offers unconditional annual indexation of 2% and has an extra aspiration for an additional 1%.
“According to the regulations, we have to provide 2% indexation and our current 105-106% coverage ratio also includes the 2% unconditional indexation,” says René van Pommeren, member of the board and the investment committee. “However, since inception, the fund has offered indexation of more than 6%, and all indexation possible will be granted to the participants. But the current low-interest-rate environment is making it more difficult for us to generate the same returns again for the foreseeable future.”
The main objective behind the investment strategy of SPF Fysiotherapeuten is the desire to mitigate the risk that the fund might not be able to meet its liabilities.
Its investment portfolio has been split into two parts – a matching portfolio of around 30%, which is designed to meet the targeted 2% nominal interest-rate risk through hedging, incorporating cash, fixed-income securities and derivatives; and a return portfolio of around 70%, which aims to add alpha and additional indexation. Prior to 2005, the pension fund had a fixed discount rate of 4%. At the time, a matching/return portfolio split was less relevant.
Since the financial crisis, the fund’s fixed-income mix has become more diverse.
While a 17% allocation to government bonds in the euro-zone still represents the largest part of the overall portfolio, with the exception of real estate, the bias towards euro-zone securities has diminished slightly in favour of emerging market debt, which currently makes up 3% of the overall strategic portfolio.
“Investments in emerging market debt started after the financial crisis when the fundamentals of emerging economies were perceived to be stronger than those of developed markets,” says van Pommeren. “We had discussions as to whether investments in investment grade sovereign bonds were still safe post-crisis. Therefore, we decided to step away from the conventional benchmark approach and moved to a more tailor-made approach, in which the core European countries like Germany, the Netherlands and France have a larger part of the mix than they had in the past. However, the fund is also still invested in Italy and Spain, albeit to a smaller extent. Diversification is key to success and is widely used throughout the whole portfolio.”
SPF Fysiotherapeuten also decided to alter its currency hedge by lowering the dollar hedge and increasing its allocation to US equities at the expense of European equities. In addition, strong Dutch mortgages were added to the portfolio and at present make up 4%.
Global high yield and alternatives assets such as hedge funds, infrastructure and private equity have always played an important part in the asset mix of SPF Fysiotherapeuten. The global financial crisis did not significantly change the allocation to alternatives.
“We regularly review whether these investments fit the goals, risk management and investment beliefs of our fund,” says van Pommeren. “Last year, we discussed whether a fund-of-hedge-funds structure is profitable due to its high costs, which is one issue we like to keep under control. As part of this review, we decided to change the private equity and hedge fund portfolios in 2013.”
SPF Fysiotherapeuten decided to focus on the hedge fund strategies, which represent the largest diversifier on a total portfolio level. In turn, it decided to sell a general fund-of-hedge-funds strategy. Hedge funds now make up 4% of the overall portfolio and private equity, 2%. Overall, however, the changes were limited in nature, van Pommeren points out.
The strategic asset allocation corresponds to the portfolio established by the last ALM study. Equities make up only 20% instead of the 35% as stated in the ALM study but this gap has been filled by the 14% allocation to alternatives.
“ALM studies are an important basis for our policy and investment,” says van Pommeren. “They can give us an idea of economic scenarios, such as inflation, deflation and growth. However, because their input relies on past figures, they can also be risky. This is why we do not rely too much on the ALM study with regard to alternatives. We also seek qualitative assessments – for example, through portfolio plans, in particular for alternatives where we do not have much reliable historical data.”
ALM reviews are undertaken every three years. The next one is due later this year.
“The fund is positioned for an interest-rate increase because it is quite short on duration at the moment, given the 50% hedge ratio,” says van Pommeren. “We are also very alert to the dynamic circumstances of the markets and thus have the opportunity to act if a specific risk-premium opportunity arises, meaning we can quickly enter or exit a specific asset class.”
One of the main goals of the fund is safeguarding against the risks of underfunding or an unacceptable slide in the funding level.
While many Dutch pension funds use derivatives to achieve their interest-rate hedge, what distinguishes SPF Fysiotherapeuten from some other funds is that those are integrated into the investment process. The fund uses a so-called integrated portfolio to mitigate the interest rate risk vis-à-vis the liabilities, while the return portfolio is designed to generate an excess return over the liabilities.
“That means that there is the opportunity to switch from swaps to bonds and vice versa,” says Ada Wouters-Brongers, chair of the investment committee at SPF Fysiotherapeuten. “The goal between derivatives on the one hand and physical bonds on the other is to stay within the risk target of the matching portfolio, for which we employ an optimisation model. It is a more or less dynamic approach and the process was the reason why we were shortlisted at the IPE Awards 2013.”
For its matching portfolio, SPF Fysiotherapeuten decided not to use a traditional benchmark but, instead, to dig into the underlying bonds and sectors.
“Based on the fund’s willingness and ability to pay, we constructed a set of tailor-made euro government bond and credit sector benchmarks to create – with the help of interest rate derivatives – the interest rate hedge,” says van Pommeren. “For the return portfolio, meanwhile, we focus more on the ultimate risk source than traditional asset classes. To monitor our equity fund managers we use MSCI indices.”
All of the pension fund’s assets are managed externally and selected by the fund’s fiduciary manager, Syntrus Achmea. The pension fund has made use of a fiduciary manager since inception and usually meets with it on a weekly basis.
“We have outsourced nearly everything but that does not mean that the outsourced work is no longer our responsibility,” says Wouters-Brongers. “The Dutch regulator states that the board is responsible for every decision taken.”
One of Syntrus Achmea’s main responsibilities is manager selection. For all asset categories a best-in-class approach is applied.
During manager selection, Syntrus Achmea will create a shortlist of managers who will receive a request for proposal (RFP). Based on that shortlist, a ranking is compiled and the top three managers are invited to talk to the investment committee, after which a decision is taken together with the fiduciary manager.
Investments in real estate and infrastructure and their managers are selected by European engineering consultancy Grontmij Capital Consultants.
The financial assessment framework (FTK) regulations set by the Dutch regulator require a specific minimum funding level based on the composition of the asset mix of pension funds. Depending on the level of its funding ratio, the fund is, therefore, sometimes restricted regarding changes to its asset allocation or in adding asset classes.
“But we do have constructive debates with the regulator about investments in innovative asset classes, such as private equity and hedge funds,” notes van Pommeren.
SPF Fysiotherapeuten is fully committed to good pension fund governance. Since the financial crisis, there has been greater focus on risk management and the quality of reports. Everyone on the board and on the investment committee of SPF Fysiotherapeuten is a physiotherapist.
“Because we are not experts in asset management we need additional specialists who undertake a certain amount of work for us within the regulatory framework of the law,” says Wouters-Brongers. “We believe this combination has been the reason for the recent good results.”
The board consists of seven members and there are five investment committee members. In addition to the seven members, the board also has a consultant accountant and actuary, and the investment committee has a professional adviser independent from Syntrus Achmea.
Apart from the low-return environment, one of the biggest challenges facing SPF Fysiotherapeuten is the choice between a nominal, real or potentially even a hybrid pension contract under the new FTK framework.
“After thorough investigation, we are tending toward the real contract because, with 2% unconditional indexation, our situation resembled that of the real contract, anyway,” says van Pommeren. “Nevertheless, we have an issue with the timetable. The Dutch regulator wants to implement this very quickly but it takes a lot of time to apply a new contract thoroughly in all parts of the pension fund.”
The solidarity of members is another issue to be addressed. “Younger physiotherapists are struggling, as prices for their sessions are decreasing and they are earning less,” says van Pommeren. “We are increasingly being asked whether they can take a contribution holiday, which is not possible.”
Contributions of full-time working physiotherapists amount to about €6,000 a year.